OBJECTIVES
1 Explain the internal context of strategy
2
Identify a firm’s resources and capabilities and explain their role in its performance
3
Define dynamic capabilities and explain their role in both strategic change and a firm’s performance
4
Explain how value-chain activities are related to firm performance and competitive advantage
5
Explain the role of managers with respect to resources, capabilities, and value-chain activities
1

COMPARATIVE INDUSTRY REFORMANCE
Semiconducto r
Global Auto
Grocery Store
ROA
ROS
How do such differences in profitability materialize?
2

RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS
Resources
Managers
Management strategic decision making
Capabilities
Strategy
Competitive advantage/ disadvantage
Performance
3

RESOURCES AND CAPABILITIES: FUNDAMENTAL BUILDING
BLOCKS OF STRATEGY
Strategy
The inputs that firms use to create goods and services
•
Undifferentiated or firms-specific
•
Tangible or intangible
•
Easy to acquire or difficult
A firm’s skill in using its resources to create goods and services.
The combination of procedures and expertise that the firm relies on to engage in distinct activities in the process of producing goods and services
4

TRUST AS AN ORGANIZATIONAL RESOURCE
1 Trust is an intangible resource
2 A trustworthy reputation for a firm can be leveraged.
5

KNOWLEDGE
Knowledge as a resource
Explicit (easy competitive intelligence)
Tacit (more valuable)
6

EXAMPLES OF CAPABILITIES
Company Capability
Logistics -- distributing vast amounts of goods quickly and efficiently to remote locations
Result
200,000-percent return to shareholders during first 30 years since IPO 1
An extraordinarily frugal system for delivering the lowest cost structure in the mutual fund industry, using both technological leadership and economies of scale
Generating new ideas then turning those ideas into new, profitable products
25,000-percent return to share-holders during the 30-plus year tenure of CEO
John Connelly.
2
As for ongoing expenses, shareholders in Vanguard equity funds pay, on average, just $30 per $10,000, vs. a
$159 industry average. With bond funds, the bite is just $17 per $10,000
30 percent of revenue from products introduced within the past four years
1: Stalk, Evans, and Shulman, 1992
2: Makadok, 2003
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THE VRINE MODEL
Test Competitive implication Performance implication
Valuable?
Does the resource or capability allow the firm to meet a market demand or protect the firm from market uncertainties?
If so, it satisfies the value requirement.
Valuable resources are needed just to compete in the industry, but value by itself does not convey an advantage
Valuable resources and capabilities convey the potential to achieve “normal profits” (i.e., profits which cover the cost of all inputs including the cost of capital)
Rare?
Assuming the resource or capability is valuable, is it scarce relative to demand?
Or, is it widely possessed by most competitors?
Valuable resources which are also rare convey a competitive advantage, but its relative permanence is not assured.
The advantage is likely only temporary.
A temporary competitive advantage conveys the potential to achieve above normal profits, at least until the competitive advantage is nullified by other firms
Inimitable and nonsubstitutable?
Exploitable?
Assuming a valuable and rare resource, how difficult is it for competitors to either imitate the resource or capability or substitute for it with other resources and capabilities that accomplish similar benefits?
Valuable resources and capabilities which are difficult to imitate or substitute provide the potential for sustained competitive advantage
A sustained competitive advantage conveys the potential to achieve above normal profits for extended periods of time
(until competitors eventually find ways to imitate or substitute or the environment changes in ways that nullify the value of the resources)
For each step of the preceding steps of the VRINE test, can the firm actually satisfy the VRINE requirements but exploit the resources and capabilities that it which the firm is unable to exploit owns or controls?
Resources and capabilities that actually result in significant opportunity costs (other firms would likely pay large sums to purchase the
VRINE resources and capabilities).
Alternatively, exploitability unlocks the potential competitive and performance implications of the resource or capability
Firms which control unexploited VRINE resources and capabilities generally suffer from lower levels of financial performance and depressed market valuations relative to what they would otherwise enjoy (though not as depressed as firms lacking resources and capabilities which do satisfy VRINE)
8

SUSTAINABILITY
Sustainability:
Just having a competitive advantage is not enough. Can it be sustained?
Durability
Imitability
9

TANGIBLE AND INTANGIBLE ADVANTAGES
Intangible Tangible
+ =
Location selection
Brand
+
+
Rural real-estate
High traffic real-estate
=
=
Wal-Mart
McDonald’s
10

HOW WOULD YOU DO THAT?
Valuable?
Do patents on Zoloft ® provide value?
Pfizer’s
Zoloft ®
Rare?
Do Pfizer's patents provide
“rarity”?
Inimitable and non-substitutable?
Can competitors imitate?
Can they substitute?
Exploitable?
Can Pfizer exploit?
11

DYNAMIC CAPABILITIES
Start-up plans
People
Brand
Location
Processes
Mail Boxes Etc. franchise
Dynamic capability: how we integrate reconfigure, acquire, or divest resources for competitive advantage?
Value
Mail boxes, etc., has developed the ability to combine resources better than the competition
12

VALUE CHAIN: INTERNET STARTUP EXAMPLE
Firm
Infrastructure
Support
Activities
Human
Resources
Technology
Development
Procurement
Inventory system
CDs
Shipping
Inbound shipment of top titles
Warehousing
Inbound
Logistics
Financing, legal support, accounting
Recruiting, training, incentive system, employee feedback
Site software
Computers
Telecom lines
Server operations
Billing
Collections
Pick & pack procedures
Site look & feel
Customer research
Return procedures
Shipping services
Picking and shipment of top titles from warehouse
Shipment of other titles from thirdparty distributors
Media
Pricing
Promotions
Advertising
Product information and reviews
Affiliations with other websites
Returned items
Customer feedback
Operations Outbound
Logistics
Primary Activities
Marketing
& Sales
After-Sales
Service
13

GUIDELEINES FOR OUTSOURCING
1 Activities that can create value for the firm should not be outsourced.
2 Those activities that represent key sources of learning for the firm should not be outsourced.
14

USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE
Identical Differentiated
Find a different way to perform activities
Longer-lasting advantage
Find a better way to perform the same activities
Shorter-term advantage
(competitors catch up)
15

TRADE OFF PROTECTION YOUR RIVALS CHOOSE NOT TO COPY YOU
Selected difference between Southwest and large Airlines
Southwest Major Airlines
Technology and design
•
Single aircraft
•
Multiple types of aircrafts
Operations •
Short segment flights
•
Smaller markets and secondary airports in major markets
•
No baggage transfers to others airlines
•
No meals
•
Single class of service
•
No seat assignments
•
Hub and spoke system
•
Meals
•
Seat assignments
•
Multiple classes of service
•
Baggage transfer to other airlines
Marketing •
Limited use of travel agents
•
Word of mouth
•
Extensive use of travel agents
Southwest made choices so that competitors did not copy because copying would require them to abandon activities essential to their strategies
16

INNOVATION AND INTEGRATION OF THE VALUE CHAIN
Area of innovation
IKEA Transferred assembly and delivery to the consumer
Dell Choose an entirely direct distribution model
(rather than through retailers) and outsourced component manufacturing
17

STRATEGIC LEADERSHIP
18